Final answer:
Selling government bonds as part of a contractionary monetary policy by the Fed is most likely to lead to a contraction of the money supply, ultimately resulting in higher interest rates and potentially higher unemployment.
Step-by-step explanation:
When the Federal Reserve (the Fed) is concerned about the potential for inflation, it may engage in a contractionary monetary policy to cool down the economy. This involves selling government bonds, which shifts the supply curve in the bond market to the right. As a result, the price of bonds falls and the interest rate goes up. In the money market, the Fed's bond sales reduce the money supply, further raising the interest rate. Higher interest rates make borrowing more expensive, which tends to reduce investment and consumption.
A stronger dollar makes US exports costlier and imports cheaper, leading to a decrease in net exports. Consequently, the aggregate demand shifts to the left, leading to a lower price level and, in the short run, lower real Gross Domestic Product (GDP). If the question focuses on which outcome is the most likely after the Fed's action, the correct answer would be C. Contraction of the money supply. This contraction is also likely to result in higher interest rates, and both of these effects can eventually lead to higher unemployment if the policy slows economic growth too much.